Mariano Rajoy, Prime Minister of Spain, made a very interesting comment in the Senate today. He told the politicians that virtually EVERYONE in Spain, including banks, corporations and regional governments, have been locked out of credit markets. The only institution that is still able to issue debt, according to Rajoy, is the Spanish Treasury itself. Now, that’s a frightening statement for the leader of a country to make in public – yet what’s even more frightening for the Spanish people, one-fourth of whom are unemployed, is that it can’t be too far from the truth.
Emma-Ross Thomas reports from Madrid for Bloomberg (h/t po1):
Prime Minister Mariano Rajoy said the debt agency is the only borrower left in Spain that can finance itself on markets as banks, companies and regional administrations have been shut out.
“Today, the Treasury is practically the only one that finances itself on the markets,” he said in the Senate in Madrid today. Being locked out of debt markets isn’t “theoretical” as it’s “happening to the immense majority of regions, our whole financial sector and most big companies.”
Rajoy once again raised the threat of an international bailout as he seeks to convince Spaniards to accept spending cuts even as unemployment approaches 25 percent. His comments also underline the challenge the government faces as it tries to overhaul the banking industry without overburdening public finances.
Rajoy, in power since December, declined to answer a question from reporters as he left the Senate on how much public money may be needed to shore up Bankia, the lender with the biggest Spanish asset base and 38 billion euros ($49 billion) of real-estate assets.
Alfonso Alonso, the head of Rajoy’s People’s Party in Parliament, said today it seems “obvious” that Bankia will need help cleaning up its balance sheet after the Economy Ministry said it aimed to restructure the lender. Rodrigo Rato said yesterday he was standing aside as chairman of the group and proposed Jose Ignacio Goirigolzarri, former chief operating officer of Banco Bilbao Vizcaya SA (BBVA), as executive chairman.
When you think about it, though, even the Spanish Treasury has been effectively locked out of private credit markets. It has only been able to receive funding at relatively low interest rates (compared to those of, say, Greece) by the good grace of the ECB, which has gifted under-secured cash to the peripheral European banks, which have, in turn, recycled that cash into their government’s debt. At the same time, bond markets have been somewhat placated by the constant expectation that either the EFSF/ESM will acquire enough capital to backstop Italy and Spain, or that the ECB/Germany will relent and agree to directly monetize Eurozone government bonds.
Both of those things are looking extremely unlikely at this point, especially in the wake of the Greek/French elections and the message that systemic austerity will no longer be tolerated. Without the pillars of austerity and “structural adjustment”, there is very little justification for the ECB or Germany to continue backstopping the peripheral finances of the Eurozone. It’s not as if the consumers or businesses in these countries can even afford to buy Germany’s exports anymore, as made all too clear by Rajoy’s comments, and the failure of peripheral banks is all but guaranteed. When a financial institution such as Bankia is bailed out, make no mistake – there will be no one able or willing to bail out the Spanish Treasury.